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Monday, 28 February 2011

Turkish Foreign Minister Ahmet Davutoglu declared a successful end February 28 to what he called "the most comprehensive evacuation operation" in Turkey's history, as the arrival at an Istanbul airport of 132 Turks caught in Libyan fighting pushed the total number of Turks repatriated during the past week to over 17,500.

Unlike some Western governments, Davutoglu's Justice and Development Party (AKP) government has been widely praised in the Turkish media for the speed and efficiency of its rescue operation. But the sheer number of Turks evacuated from Libya carries an ominous message for Ankara, analysts warn: increasingly present as an economic actor in the Middle East and North Africa since the AKP came to power in 2002, Turkey risks being harder hit by the economic side-effects of political instability in the region.

Five years ago, Turkish trade with the countries hit by instability over the past month was worth just US $8.6 billion, with imports outnumbering exports, says Osman Arolat, editor of Dunya, a Turkish business daily. "Since then, trade has gone up by 177 percent, with Turkey exporting US $5.5 billion more than it exports."

The mineral water that bubbles up from rock springs in the Siwa Oasis, a cluster of palm trees and mud huts in Egypt’s western desert, is reputedly some of the purest in the Middle East.

Safi Water, the company that sells it, has no website and no detectable advertising, though it does not seem to suffer from its low profile. One of its best customers is US Central Command, which buys the bottled water to quench the thirst of the thousands of US soldiers fighting in the Middle East.

It is one of the companies of the National Service Projects Organisation, part of the Egyptian defence ministry and one of a series of military-run entities that make everything from fertiliser and vehicles to olive oil and bread.

Qatar said Monday it plans to invest EUR300 million in Spain's savings banks, or "cajas," in what may be the first injection of sovereign capital in the troubled, cash-hungry sector since the start of the 2007-2008 crisis.

The announcement came just as Moody's Investors Service said the cajas and other Spanish banks may need to raise as much as EUR50 billion to boost their solvency and regain market confidence, more than twice the amount the Spanish government had said would be needed in coming months.

Food price inflation, political stagnation and rapid population growth have fanned the fires of discontent among the enormous numbers of young people in the Middle East and north Africa who are unemployed and progressively better-educated .

As this week’s beyondbrics chart shows (below the break), the region has the highest rate of unemployment in the world and the second-slowest rate of economic growth – beating only the stagnant developed world. In terms of youth unemployment, though, it is in a losing class all of its own.

More than 60 per cent of the region’s population are under 25 years old and their prospects are grim.

Middle East shares tumbled, sending Dubai’s stock index to the lowest in almost seven years, as political unrest in the region spread to the Sultanate of Oman, prompting investors to trim riskier assets.

Emaar Properties PJSC, builder of the world’s tallest skyscraper, slumped to the lowest since 2009 and Dubai Islamic Bank PJSC retreated 3.2 percent. The DFM General Index slid 3.8 percent to 1,410.7, the lowest since June 2004, at the 2 p.m. close in Dubai, bringing its drop for the month to 8.1 percent. Oman’s MSM30 Index plunged 4.9 percent, making it the world’s worst performing benchmark index. The Bloomberg GCC 200 Index fell 1 percent at 2:41 p.m. in Dubai. It has lost 11 percent since Tunisia’s president fled amid protests that spurred protests in Egypt, Libya, Morocco, Yemen and Bahrain.

Two demonstrators were killed in Oman and several wounded in clashes with police yesterday, according to hospital and government officials. Hundreds of protesters, many unemployed, gathered for a sit-in for a second day in Sohar, north of the capital city Muscat. Sultan Qaboos Bin Said, the country’s ruler since 1970, ordered the government to hire 50,000 Omanis and to pay 150 rials ($390) a month to registered job seekers.

Oil traded near a 29-month high in New York after turmoil that cut Libya’s output spread to Oman, raising concern Middle East production may be disrupted further.

Futures had the biggest weekly gain in two years last week as hedge funds raised bullish oil bets amid estimates that Libya’s crude flow was cut by as much as two-thirds. Protestors in Oman were killed in clashes with police yesterday. The turmoil has made crude prices more vulnerable to a “spike-and- crash” scenario, according to Bank of America Merrill Lynch.

“The flash-fire is spreading,” said Thorbjoern Bak Jensen, an analyst at Global Risk Management in Middelfart, Denmark. “The situation in Oman creates speculation the unrest will spread to Saudi Arabia itself, though living standards in Saudi are higher and the country is much richer.”

Egypt’s bourse, shut for a month because of the popular uprising that ousted President Hosni Mubarak, will resume trading tomorrow as unrest in Libya and Oman is causing stocks in the region to tumble.

Dubai’s benchmark DFM General Index plunged 4.5 percent to the lowest intraday level since June 2004 at 1:19 p.m. in Dubai. The Bloomberg GCC200 Index of companies in the Persian Gulf has lost 10 percent since Jan. 27, the last day shares in Egypt traded. Global depository receipts of Orascom Construction Industries also slid.

“The market should have opened much earlier,” said Walaa Hazem, who helps manage $1 billion in Egyptian equities and fixed income as vice president for asset management at HC Securities & Investment in Cairo. “Locking people’s money is something very bad. This will put selling pressure on the market, in addition to the regional turmoil and the economic slowdown.”

Dubai stocks fell to earth today closing 4.5 per cent down at a level below the lows of last summer and not seen since 2004, before the stock market boom of 2005.

In 2005 the Dubai Financial Market was the best performing stock market in the world. It crashed in 2006 to record one of the world’s worst performances that year and has been bumping a long the bottom since then.

The ArabianMoney newsletter out today (sign-up here) argues that the DFM will reach a true market bottom by the summer. By then global stock markets should have corrected sharply due to higher oil prices and that process will subsequently bring oil prices down alongside Dubai share prices as in late 2008.

The United Arab Emirates central bank would be happy to see a loan-to-deposit ratio of 85 percent for the country’s banking system, Gulf News reported, citing governor Sultan Bin Nasser al-Suwaidi.

Banks in the federation had a loan-to-deposit ratio of 98.3 percent at the end of December, according to central bank data.

Al-Suwaidi also told a news conference that U.A.E. banks’ performance this year will be similar to 2010 and distribution of dividends shouldn’t exceed 50 percent of their profit last year, the Dubai-based newspaper reported.

As we begin another week of turmoil in the Middle East, and countries further afield batten down the hatches in an effort to preclude being next, here are some of the things we don't know:

-- Whether oil prices are going up to $220 a barrel (and $5 at the pump), or down to $70 a barrel and more like $2.50 for a gallon of gasoline in the United States;

-- Whether Saudi Arabia really increased its oil production last week, or if the truth is a bit different;

-- And, finally, whether Russia's gentleman president, Dmitry Medvedev, has been rummaging through Vladimir Putin's archive of paranoid off-the-cuff remarks, and truly does not grasp what is happening around him.

Oil is breaking new highs on a daily basis. This is worrisome indeed as it exacerbates the evolving inflation story. That mere inflation story may transform into a scary stagflation theme if oil stays high or surges higher, thus, prematurely ending our infant economic growth story.

It is a time of celebration in Kuwait. This may be part of my optimistic view. Yet, a bigger part is actually based on fundamentals. I do not believe oil will maintain the current $114 level or rise further. To support my view, please refer to the charts below which put the contagion risk in perspective. Comforting enough, Saudi’s spare capacity can easily cover production disruptions in Libya and Egypt! Saudi, with minor help from Kuwait and the U.A.E., can also make up for Algeria’s production if it faces issues in the future.

When one combines the above data points with lower demand from slowing emerging markets and ample oil reserves in the U.S., we can deduce that the current rise in oil prices is a temporary fear-driven dislocation in the market. That is why I would recommend shorting oil at these levels.

Brent crude rose more than $2 a barrel to a high of $114.50 on Monday as concern persisted about security of supply from the Middle East and North Africa even after top exporter Saudi Arabia boosted supply to meet the shortfall caused by a cut in exports from Libya.

Violent revolt in Libya has shut down as much as three-quarters of its output, according to some estimates. As protests have intensified and spread through the Arab world, investors fear any impact on output from Saudi Arabia.

Brent crude was up $1.79 113.92 a barrel by 12:35 a.m. ET. U.S. crude rose $1.45 at $99.33 a barrel.

Oil-rich monarchies in the Gulf may have chosen to pre-empt protests by opening their coffers to their citizens, but other Arab states in turmoil -- or in the wake of it -- lack the "cash for calm" option.

The fact that Arab rulers in the Gulf have responded with money and benefits to the wave of popular unrest sweeping across the region betrays their deep concern, analysts say.

While a swift injection of cash may take the edge off potential crises in the rich states, only huge amounts of international aid can ensure development of those poorer Arab nations where the current unrest began, they believe.

Companies in Abu Dhabi and other stable Gulf areas are likely to enjoy smooth access to financing even as political turmoil sweeps across much of the Middle East, Islamic finance executives said yesterday.

Along with Qatar, the Abu Dhabi Government is the most highly rated sovereign in the Middle East, ensuring that its companies can raise money cheaply, Raja Teh Maimunah, the global head of Islamic markets at Bursa Malaysia, said at the Global Financial Markets Islamic Forum in Dubai.

"There's no other [regional issuer] that can lend [at "AA"] but Abu Dhabi, especially with the downgrade of Bahrain," she said. "Yields unfortunately have spiked, but we need stable jurisdictions like Abu Dhabi."

High service fees charged by banks and excessive lending practices are the targets of a host of retail banking rules issued yesterday by the Central Bank.

The legislation follows a rise in the number of complaints from customers unhappy with how much banks are charging for basic services. It also comes in response to a wave of bad consumer debt that left some banks with big losses during the financial crisis.

The new rules cover personal and car loans, with limits capping the amount banks can lend to customers at 20 times their salary. They also set the period of loan repayment at 48 months. In addition, the rules restrict service fees lenders can impose for personal accounts, cheques and debit cards.

Abu Dhabi is recruiting investment companies that will allow the capital to develop into a major international hub for financial services.

Three financial companies have announced expansion plans in Abu Dhabi in the past month, and more could be on the way as the capital looks to move beyond its traditional focus on property development, banking and tourism.

"There is a lot of wealth available but it gets spent elsewhere and the financial side is not well developed in Abu Dhabi," says Laurent Depolla, an executive director of Mubadala Services Ventures.

Glencore International AG, the largest commodities trader, is set to start talks with potential investors for an initial public offering and will begin briefing analysts today, said people with knowledge of the plan.

Discussions with funds including China Investment Corp. and Qatar Investment Authority are about to begin, said one of the people, who declined to be identified because the talks are confidential. Mining analysts in London will attend a two-day briefing in the city starting today, with some also visiting assets owned by Glencore later in the week, two people said.

Glencore is studying a $10 billion IPO in London and Hong Kong by the third quarter, to be handled by Citigroup Inc., Credit Suisse Group AG and Morgan Stanley, two people said last month. Liberum Capital Ltd. valued the Baar, Switzerland-based company at $47 billion to $51 billion in a July report.

Trading in the Indian currency is swiftly gaining popularity in Dubai. Futures contracts of the rupee against the dollar listed on the Dubai Gold & Commodity Exchange (DGCX) have doubled in the first two months of this calendar year. The previous two years saw a five-fold increase in these contracts.

Dubai is a major exporter of oil, gold and diamonds to India and the frenzy to hedge against rupee risk is such that soaring currency trading in the emirate could pose serious competition to volumes on Indian exchanges in the next few years, say market players.

On February 22, the number of rupee-dollar contracts touched a record 12,499 on the DGCX, breaking the previous record of 11,968 on January 5. On an average, over 8,000 rupee-dollar contracts are traded daily on the DGCX, churning out Rs 1,500-1,600 crore in volumes.

As the people’s revolutions sweep across the Middle East from Morocco to Bahrain, a number of analysts including the author have started wondering about the new political and economic order of that region, after the dust has settled down. For further discussion, the Middle Eastern region undergoing the turbulences can be divided into two parts: the Maghreb region comprising of countries of North Africa like Morocco, Algeria, Tunisia, Libya and Egypt and these are countries in the proximity to the European Union. The second part comprises of countries in the Arabian Peninsula like Saudi Arabia, Syria, Jordan, Yemen and the Gulf States including the Emirates, Bahrain, Oman and Kuwait. Quite surprisingly Iran and Iraq are out of these revolts as those countries have specific problems of their own.

The consequences of what is happening in this region have a global impact due to a number of reasons and their effects have been amplified by the global impact of news transmission. This allows for people in this region to see and want to imitate what is happening in other countries. Thus, the Egyptian revolutions has been attributed to innovations in communication technology like Tweeter and/or Facebook. The second reason why events in that region have a global impact is that the region consists of countries that are major producers of crude oil, by far the most strategic commodity in the World. Libya accounts for 2% of global oil production and 10% of the oil used in the European Union. Thirdly, the region is the passage way for the majority of products involved in international trade through the Suez Canal. Indeed, the Suez Canal is the major route connecting Europe to Asia and to some extent to America. The supply of various raw materials and finished products, of which the most important is crude oil pass through here. The Suez Canal is also a path route for the telecommunications fiber network that facilitates phone, email, internet communications between Europe and Asia. Fourthly, the region is undergoing dynamic changes as regards to demographic issues – youths account for the majority of the population, an increase in fundamentalism (especially Islamic) and social tensions including the role of women in society. The equation is made more difficult by the Palestinian issue and the future of Israel in the region, dominated by Arab states that might not necessarily be friendly to it.

Another of the major impacts of the revolution in the Middle East is economical, especially the global role of huge funds that are owned by those states. I have in mind investments undertaken by those states through specific Sovereign Wealth Funds, especially those of major oil producers like Libya.

On his return from months of hospitalisation and recuperation in the US and Morocco, King Abdullah of Saudi Arabia was characteristically unstinting in his generosity. He lavished $36bn on his subjects, in pay rises and debt forgiveness, and to help them buy houses and start businesses. As munificence goes, this was princely. Whether it was politic is another question.

It might buy off whatever unrest is brewing underneath the kingdom’s thick layers of political, military and religious control. Or it may be perceived as the panicky response of an absolute monarchy to the wave of revolution unfolding across the Arab world; the rulers of neighbouring Bahrain offered their people a similar bribe but they took to the streets anyway. Yet King Abdullah’s decision to hose Saudis with money to pre-empt any revolt is certainly old politics in a new era – and unless it is followed by political reforms the king himself has timidly championed, the future of the kingdom must be in question.

The House of Saud is, of course, resilient. It resisted the radical pan-Arabism of Gamal Abdel Nasser when Nasserism was sweeping all before it, from Syria to Yemen. It saw off Ayatollah Khomeini’s attempts to export the Iranian revolution. It has overcome violent Islamist challenges, and emerged reasonably unscathed after inviting half a million foreign troops on to its soil – the birthplace of Islam – during the 1990-91 Gulf war. Many have bet against the al-Saud, but here they still are.

The UK foreign minister William Hague announced on Sunday that his governmnent has withdrawn any diplomatic immunity for Libya's leader Moammer Gaddafi and his family. "It's very clear where we stand on his status as a head of state," he said in a BBC interview.

What is less clear is the status of Libya's sovereign wealth fund, the Libyan Investment Authority. As FT Alphaville pointed out, the fund is managed by an inner circle of Gaddafi advisors and family members, and is subject to asset freezes much like the personal wealth of the Gaddafi family. The question of who should take control of these assets - an estimated $60-80bn worth - in a post-Gaddfi Libya will be a tricky one.

While Libya's SWF faces an uncertain future, common sense would say it is owned by the Libyan state, and should eventually be managed by the internationally-recognised government of Libya that emerges from the current chaos.